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Slovenia: Economy Improving In Spite Of EU Criticism

By Michael Wyzan

Prague, 2 February 1999 (RFE/RL) -- Last year, Slovenia saw some improvement over its respectable, if unspectacular economic performance in previous years.

With its minimal trade dependence on the former Soviet Union (which accounted for only 3.9 percent of exports in January-October 1998) and low level of capital inflows, Slovenia is arguably the least vulnerable of all Central European countries to the Russian financial crisis.

Slovenia's Gross Domestic Product (GDP) grew 4.8 percent in January-June 1998 and rose an estimated 4 percent for the year, up from 3.8 percent in 1997.

Growth has been driven by exports, which in dollar terms rose 6.8 percent during January-August, compared with 0.7 percent for all of 1997. The export growth was largely due to faster economic growth in the country's main EU trading partners especially early in the year.

Another boost to exports came from improved efforts at controlling labor costs, following the passage of legislation in 1997 that replaced full indexation of wages with partial indexation.

Monthly gross wages ($704 in July 1998) remain the highest among transition countries, although they're down from $755 in 1996.

Despite slower wage growth and faster production rises, the official unemployment rate remains virtually unchanged (14.5 percent in October 1997 and 14.6 percent a year later).

There was concern early in 1998 about higher inflation, given the government's commitment to liberalizing prices. Inflation, however, sank to 6.4 percent from November 1997 to November 1998, the lowest rate since independence.

Slower inflation is partly due to tight fiscal policy, with the budget deficit in 1998 expected to have been about 1 percent of GDP for the second year running. This is another result of the stable exchange rate. The tolar, after weakening to 173 to the U.S. dollar in March 1998, strengthened to under 163 to the U.S. dollar last month.

The foreign trade deficit during January-October 1998 was $601 million, down from $692 million during the same period in 1997. All other current account balances are positive.

The Bank of Slovenia's foreign reserves reached $3.7 billion in November 1998, up from $3.3 billion the previous year. In contrast to these favorable indicators, foreign direct investment fell to $130 million during January-October 1998 from nearly $250 million during the same period in 1997.

The hallmark of Slovenia's macroeconomic policy has been caution. There has been a hesitancy toward foreign investment, approaches toward fiscal imbalances have been conservative and the pace of pension and tax reform has been leisurely.

Slovenia's cautious approach to reform has not found favor with the European Commission, whose November 1998 report on Slovenia's progress toward accession was critical. The commission pointed to a poorly supervised, cartel-like banking sector, slow liberalization of the capital account, incomplete tax reform, and slow structural reforms at state enterprises and utilities.

These criticisms may be merited, but one should not lose sight of the fact that Slovenia is better prepared to bear the costs of accession than other candidate countries.

(The author is a research scholar at the International Institute for Applied Systems Analysis in Laxenburg, Austria).